Small business bearing the brunt of corruption

Katya Gorchinskaya has been the Kyiv Post's deputy chief editor since 2009 and is a contributor to The Wall Street Journal and other publications. Follow her on Twitter @kgorchinskaya.

KYIV - Corruption in Ukraine is smothering small businesses before they can grow and discouraging foreign investment - and the government must plunge into deregulation to reverese the trend, said specialists at a conference of shadow economy in Kyiv Saturday June 7. Even those businesses that make it past the difficult first stages find themselves crippled by the need to pay bribes, said researchers from the Economics Education and Research Consortium and the Masters in Economics program of the Kyiv Mohyla Academy. Worse, small businesses bear face a heavier demand for bribes relative to their number of employees, according to 1995 survey by the World Bank. The study, which encompassed more than 200 firms across Ukraine, found that enterprises with fewer than 10 employees paid bribes amounting to more than $150 per worker annually, while companies with more than 50 employees got away with payoffs of around $35 per worker. 'Maybe this ... can explain why, after a few years of swift development, small business has started to shrink in Ukraine - an unprecedented phenomena,' wrote Irene Pinchuk, a student on the Economics MA program at Kyiv Mohyla Academy, in a report on the study presented at the conference Saturday. Other researchers cited studies showing that businessmen spend much more time wading through official bureaucracy than their counterparts elsewhere. A 1995 study found Ukrainian managers spend 30 percent of their time ensuring that government rules and regulations are followed - double the number for managers in Pakistan or Guatemala. Unsurprisingly, more and more business in Ukraine is being done beyond the bounds of government regulations: both government and independent experts reckon the shadow economy accounts for 60 percent of all the economic activity in the country. Even in drug-flushed Latin America this figure does not go beyond 30 percent, said Hrihoriy Omelchenko, chairman of Parliament's Committee on the Struggle Against Corruption and Crime. 'Ukraine is highly unattractive for any kind of legal business,' agreed Lyubov Ledomska, an analyst with the Project on Macroeconomic Reform in Ukraine run by the Harvard Institute for International Development. Ledomska blamed high import tariffs and quotas, hidden import barriers, the lack of competition in the marketplace, government bureaucracy, absence of venture capital and business infrastructure, and organized crime. Corruption and red tape in particular have been blamed for slowing the flow of foreign investment into Ukraine. Pinchuk argued that there is a direct relationship between the level of graft in an economic sector and foreign investors' reluctance to enter the market. For example, the commercial sector, in which bribes amount to over $200 per employee according to the World Bank survey, has drawn only 2 percent of all foreign direct investment, while industry, where bribes average $60 per employee, has attracted more than half of total direct foreign investment. Pinchuk concludes that Ukraine's high level of corruption is stunting its economic growth: the level of corruption affects the amount of foreign investment a country receives, which in turn affects its output. The prescription popular with many analysts is a campaign that would cut the bureaucracy and thus reduce the scope for bribe demands. Dr. Gene Ellis of the Economics Education and Research Consortium said he doubted the efficacy of 'appealing to the masses, or creating campaigns.' Instead, the government should battle corruption by slashing regulations and combating monopolies, he said.

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